Global 1 Feb 2013

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Going into 2013 there are reasons to be optimistic; rising employment levels, an end to the slowdown in China, a less volatile situation in Europe and a temporary resolution to the US fiscal cliff crisis are all positives which should impact the global economy in the year ahead. But there’s no denying the fact that the fundamentals are deteriorating and business conditions on the ground are becoming more challenging. Meanwhile, the economics and politics of stimulus and austerity will be debated furiously until growth takes a sharp turn for the better – or worse

Global business confidence dropped marginally in the fourth quarter of 2012, according to a survey of 1,994 finance professionals around the world. 43 per cent of respondents reported decreased levels of business confidence (up from 41 per cent in Q3), while only 19 per cent reported improved confidence levels. Meanwhile, 30 per cent of respondents considered that the global economy was on course for recovery (up from 29 per cent in Q3), while 65 per cent (down from 67 per cent) believed it was stagnating or deteriorating.

The Global Economic Conditions Survey, carried out in partnership by ACCA (the Association of Chartered Certified Accountants) and the Institute of Management Accountants (IMA) is the largest regular economic survey of accountants in the world, both in terms of the number of respondents and in terms of the numbers and scope of economic variables it monitors.

While changes from last quarter have been modest, this quarter’s findings raise the spectre of more instability for 2013. Manos Schizas, senior economic analyst at ACCA, said: 'Global business confidence and perceptions of the global economy are tightly correlated; it is unusual for these two indicators to move in opposite directions. The last time this happened was in early 2010, when the global recovery first started running out of steam – respondents could see what was happening to their own organisations but didn’t yet realise how many other businesses were having the same problems.'

Africa, Asia and Western Europe leading a weak recovery in Q4

The Middle East lost its narrow lead over Africa in terms of economic confidence, led by a consistent slowdown in the UAE which has persisted for three quarters; Egypt notably underperformed in the wider region. Business confidence in Western Europe continued to show a weak but sustained recovery throughout the last half of 2012 with confidence rising marginally in the UK and Cyprus, and falling marginally in Ireland. Switzerland saw the greatest fall in confidence levels in the region.

Confidence continued to fall in the US where no region managed to resist the gloom. The South and Midwest saw the greatest drop and have seen a negative trend for a year now. The West and Northeast performed better in early 2012 but have since followed the rest of the country into negative territory. Only the mid-Atlantic, where confidence was lowest to begin with, has seen more stability in the last three months.

An analysis of business conditions on the ground suggests that the global economy made some progress in the last three months. Overall, respondents in Western Europe, Asia-Pacific and Africa pointed to recovering labour markets, although their colleagues in the Americas, the Middle East and particularly South Asia were less upbeat. On balance, the GECS employment index was up both quarter-on-quarter and year-on-year.

The number of businesses reporting rising inflation has fallen sharply, after a year of steadily rising input prices, to levels lower than those seen a year ago, with the exception of commodity-producing regions such as Africa and the Middle East. However, Q3 2012 saw cashflow problems, late payment and insolvencies return in earnest and this trend continued in Q4. Continued cash and credit shortages in the new year could, the two bodies argue, tip the global economy into yet another dip.

Investment recovers slightly but incentives push investors offshore

At the global level, business investment was still down on Q2 2012 and year-on-year but had recovered marginally from the previous quarter. Even this cautiously upbeat outlook, however, disguises significant disparities.

Despite falling confidence, capital spending increased sharply in the Middle East, while Western Europe and the Asia-Pacific region also saw modest gains. Particularly encouraging was the rebound in Hong Kong and the UAE, following six months of very subdued investment, while the most positive success story came from Ireland, which saw a full year of increased capital spending despite an aggressive programme of fiscal consolidation. Less encouraging was the marginal fall in capital spending in the US, where last quarter’s losses were not reversed in the end of the year.

Recovery in the OECD turns mood back in favour of austerity despite errors of the past

Since mid-2010, finance professionals’ expectations and preferences on fiscal policy have changed significantly, as the sovereign debt crisis persisted and major stakeholders such as the IMF and the European Commission were forced to concede that the impact of fiscal consolidation on European economies had been more negative than expected.

By the end of the third quarter of 2012, respondents in Western Europe wanted their governments to stop the financial cuts. However, the modest recovery over the last three months of 2012 revived their appetite for fiscal consolidation.

Raef Lawson, Ph.D., CMA, CPA, IMA vice president of research, observed: 'In the US, the picture is completely different. Perceptions of the US economy in the last six months have been dominated by politics – the Presidential election and the fiscal cliff. Responses to our survey clearly demonstrate the effects of this, with some respondents saying explicitly that they feel polarisation and uncertainty are themselves hurting the US economy. This is evident in the behaviour of businesses, with capital spending and job creation falling throughout the last six months and US respondents reporting fewer opportunities for their organisations across the board.'

Looking ahead Manos Schizas concluded: 'Going into 2013 there are reasons to be optimistic; rising employment levels, an end to the slowdown in China, a less volatile situation in Europe and a temporary resolution to the US fiscal cliff crisis are all positives which should impact the global economy in the year ahead. But there’s no denying the fact that the fundamentals are deteriorating and business conditions on the ground are becoming more challenging. Meanwhile, the economics and politics of stimulus and austerity will be debated furiously until growth takes a sharp turn for the better – or worse.'

Global Economic Conditions: Research Methodology

The Global Economic Conditions Survey, carried out jointly by ACCA and IMA is the largest regular economic survey of accountants in the world, both in terms of the number of respondents and in terms of the numbers and scope of economic variables it monitors. Its main indices are good predictors of aggregate GDP in the OECD nation and daily trend deviations correlate well with the VIX ‘fear’ index.

This is the 16th edition of the Global Economic Conditions Survey and the 5th carried out jointly by ACCA and IMA. Fieldwork took place between 29 November and 19 December, attracting 1,994 responses from finance professionals around the world, including 640 senior managers and directors (and, within those, 154 CFOs).